Economy Reveals Hidden Strengths

The most obvious — but not the most impressive — thing about the Canadian dollar’s incredible flight has been the sound of silence that has accompanied it.

Where is the whining for which Canadians are so famous? Where is the woe-is-us call of Canadian business? Where are the cries for government to Do Something, either to stop the dollar’s rise or to subsidize its victims?

Nowhere, it seems.

When the currency took off in the late 1980s and early 1990s, there was plenty of all three to go around. This time, there has been nothing, not even a token protest last week when Bank of Canada Governor David Dodge praised the higher dollar.

What’s going on here?

First, the world is much different now than it was a decade or so ago, and we’re not just talking about the overall decline in the U.S. dollar against currencies that are not manipulated by their country’s central banks (step forward, China and Japan).

Royal Bank of Canada economist Derek Holt recently reeled off a checklist of the differences. “Then-and-now comparisons . . . are off base because . . . interest rates [are] much lower, spreads over the United States are tighter, profits are much healthier, overall costs are better behaved, balance sheets have been positively restructured over the past decade, government finances in Canada are much healthier than they were a decade ago, Canada retains a current account surplus unlike the deficits of the past, and we have finished restructuring” in response to free trade.

A decade ago, Canadians had plenty more to complain about than the currency, even though it finally hit 89 cents (U.S.). The economy was a basket case, diving into what is arguably the worst recession since the Dirty Thirties. These days, we’ve come through a U.S. recession with only some small scratches and a year of brutal setbacks — SARS, mad-cow, fires and hurricanes — that caused plenty of damage, but no lengthy downturn in the overall economy.

Yet the fallout from the dollar’s 20-per-cent rise — though far from over — has to date been remarkably mild, despite fears that it would be far worse far sooner.

We won’t get Statistics Canada’s first estimate of fourth-quarter growth until next week, but two pieces of data released Friday — for manufacturing and trade — came in much better than anticipated. Most of what factories make is exported, so they were expected to feel the hardest hit as the soaring dollar made their goods more expensive for foreigners to buy.

But in the fourth quarter, factory shipments, adjusted for price changes, increased quite smartly after two quarters of decline. It’s quite likely that manufacturing production figures, when they appear, will show an increase after four quarters of decline.

The same strength was evident in the trade numbers, again adjusted for price changes. A higher dollar should sink exports and lift imports, putting the trade surplus into a tightening vice. During the first three quarters of the year, when the dollar climbed by 14 per cent, there was a whiff of the expected: Exports slipped and imports edged up. But in the final quarter, when the cumulative rise in the dollar approached 20 per cent, exports shot up (a surprise) at a much faster pace than the large increase in imports (no surprise).

These are supposed to be the weak spots. They weren’t, which suggests the economy is far more resilient than most of us thought.

There’s other evidence. Last week, the Bank of Canada released some results from interviews it did with officials from 100 companies who were far more sanguine about the effects of the dollar’s rise than any of us might have expected. Even those hurt by the higher dollar were optimistic about future sales, although less so about future hiring and investment.

Many of those might change their minds about investment. Other figures from Statscan this week showed that the cost of machinery and equipment (most of which is imported) was down almost 10 per cent in the fourth quarter from a year earlier, a decline not seen in the 34 years for which there are data.

Economist Stéfane Marion of National Bank Financial noted that it is now relatively cheaper, for the first time since 1991, “for firms to boost output by buying equipment rather than by adding to payrolls.”

This is not good news for jobs, but it’s terrific for productivity growth. That would reverse the pattern of the 1990s, when the dollar was falling. As Mr. Dodge pointed out last week, companies then substituted cheaper labour for costlier capital, delivering lots of jobs, but weak productivity gains.

Higher productivity eventually generates its own employment gains, and we can say the same for an economy that is beginning to reveal some hidden strengths.

The sound of silence is the sound of an economy — and a business community — that seems to have figured out how to live in a rough and tumble world. It’s the sound of a grown-up.